Ethical Challenges in Turbulent Times

The problem of lax ethical standards in business is nothing new, but in recent years it seems to have escalated. In addition, public reaction has been swift and unforgiving. Any ethical misstep can cost a company   its reputation and hurt its profitability and performance. Within months after Martha Stewart  was charged with insider trading, her company’s market capitalization plummeted $400 million, although Martha and her company man- aged to survive the scandal and her stint in jail. Companies such as Nike and Gap have been hurt by accusations of exploitative labor practices in Third World factories. Oil com- panies have been targeted for allegedly abusing the environment and contributing to a host of social ills in developing nations, and pharmaceutical firms have been accused of hurting the world’s poor by pricing drugs out of their reach. Organizational stakeholders, including employees, shareholders, governments, and the general community,  are taking a keen in- terest in how managers run their businesses.

One reason for the proliferation of ethical  lapses is the turbulence of our times. Things move so fast that managers who aren’t firmly grounded in ethical values can find themselves making poor choices simply because they don’t  have the time  to carefully weigh the situation and exercise considered  judgment. When organizations  operate in highly competitive industries, rapidly changing markets, and complex cultural and social environments, a strong corporate culture that emphasizes ethical behavior becomes even more important because it guides people to do the right thing even in the face of confusion and change.81

THE BUSINESS CASE FOR ETHICS AND SOCIAL RESPONSIBILITY

The scandals that have rocked the corporate world prompted new demands from govern- ment legislators, stockholders, management experts, and the general public. One consul- tant argued in a recent  Wall Street Journal  column that the current regulatory climate distracts managers from doing what’s good for business.82  But the combination of a turbu- lent domestic environment, globalization of business, and increasing public scrutiny con- vinces many managers that paying attention  to ethics and social responsibility is as much of a business  issue as paying attention to costs, profits,  and growth.

Beyond maintaining  high ethical standards, top managers at a growing  number  of companies recognize how to target their social responsibility efforts in ways that also benefit the business. After Hurricane Katrina, for example, rather than giving a general gift, employees of Papa John’s spent weeks in a pizza  trailer handing out thousands of free 6-inch  pies, which benefited local residents and relief workers while also promoting the company’s product. Home Depot identified affordable housing for low-income families as  its primary social initiative, working collaboratively  with  Habitat for Humanity. Hundreds of thousands of would-be Home Depot customers participate as volunteers in the housing projects and how-to clinics. Starbucks builds social responsi- bility into its business model by paying hourly  employees above minimum wage, buying fair-trade coffee, and negotiating long-term  contracts with coffee growers who farm in environmentally friendly ways. These efforts  make good  business sense at the same time they build the image of these companies  as good corporate citizens.83 One organization in Spain, Unión Fenosa, pioneered the concept of corporate social responsibility  as a business issue.84

Social sustainability refers to interacting with the community in which  a company does business in a way that makes money for the company but also improves the long-term well- being of the community. In the United States, various stakeholders are increasingly push- ing new reporting initiatives connected to the sustainability movement that emphasize the triple bottom line of economic, social, and environmental performance. Naturally, the rela- tionship of a corporation’s ethics and social responsibility to its financial performance con- cerns both managers and management scholars and has generated a lively debate.85

One concern of managers is whether good citizenship  will hurt performance. After all, ethics programs and social responsibility cost money. A number of studies, undertaken to determine whether heightened ethical and social  responsiveness increases or decreases financial performance, provided varying results but generally found a small positive rela- tionship between social responsibility and financial performance.86  For example,  a study of the financial performance of large U.S. corporations considered “best corporate citizens” found that they enjoy both superior reputations and superior financial performance.87

Similarly, Governance  Metrics International, an independent  corporate  governance ratings agency in New York, found that the stocks of companies with more selfless princi- ples perform better than those run in a self-serving manner. Top-ranked companies such as Pfizer, Johnson Controls,  and Sunoco also outperformed lower-ranking  companies in measures such as return on assets, return on investment, and return on capital.88 Although results from these studies are not proof, they indicate that use of resources for ethics and social responsibility   does  not hurt  companies.89    Moreover, one survey  found that 70 percent of global CEOs believe corporate social responsibility is vital to their companies’ profitability.90

Companies  also are making  an effort to measure the nonfinancial  factors that create value. Researchers find, for example, that people prefer to work for companies that dem- onstrate  a high level of ethics and social responsibility;  these organizations can attract and retain high-quality employees.91 Customers pay attention,  too. A study by Walker Research indicates that, price and quality being equal, two-thirds of customers  say they would switch brands to do business with a company that is ethical and socially responsible.92 Enlightened companies realize that integrity and trust are essential to sustain successful and profitable business relationships with an increasingly connected web of employees, customers, suppli- ers, and partners. Although doing the right thing might not always be profitable  in the short run, many managers believe it can provide a competitive  advantage by developing a level of trust that money can’t buy.93

Source: Daft Richard L., Marcic Dorothy (2009), Understanding Management, South-Western College Pub; 8th edition.